The combined deficit of private sector DB schemes in the UK now stands at around £900 billion, up from £250 billion since the start of the millennium, despite companies pouring in £500 billion towards pension saving over that time. According to Hymans Robertson,the stark figures highlight that for too long pension schemes have been taking too much risks.

In 2000, private sector UK Defined Benefit (DB) schemes held a combined deficit of around £250 billion. Over the past 15 years companies have injected £500 billion into pensions, yet despite the staggering inflow of funds, the deficit has trebled in the time span. As it stands, the total DB deficit amounts to £900 billion, while total liabilities are now over £2 trillion – far in excess of the UK’s GDP of £1.8 trillion.

“For any company sponsoring a defined benefit scheme the numbers are stark: £500 billion of payments made, only for the deficit to have tripled 15 years later. Finance Directors and shareholders will be scratching their heads wondering how this has come to pass. For too long schemes have been taking more risk than they need to. The result is a large and expanding bill seemingly stretching forever into the future,” comments Jon Hatchett, partner at Hymans Robertson.

Much of this is according to Hatchett down to the ‘three big’ positions taken since the turn of the millennium: positive positions in equities offset by negative ones on interest rates and longevity. “Each has been incredibly costly. Rising longevity has added 10% - 15% to liabilities and falling interest rates more than 50% again, while equities have returned under half what schemes might have expected back in 2000.”

For the decades to come, Hatchett warns that DB schemes will face considerable challenges returning to a sustainable position. “The main challenge for schemes now is paying out pensions to retiring members for decades to come. The situation requires a different approach: slower deficit reduction, taking no more risk than is needed and investing in assets that deliver the income needed to pay today and tomorrow’s pensioners.” He adds: “This is a long-term game.”